Thoughts on culture and events by author and illustrator Christopher R Taylor

Tuesday, January 10, 2012

MORTGAGE SURPRISE!

“Debt matters, but not that much.”-Paul Krugman

Although Democrats tend to pretend otherwise, they know what President Obama is doing by appointing recess appointments despite the Senate being in session is wrong, just like Republicans know the Senators gavelling in and out once a day (and denying anyone the ability to do anything in the process) is wrong. The Senate is not in recess until it stops activity and declares a recess, but the president wants to do what he desires, and as he's said several times, if he can't get congress to go along, he's just going to bypass them.

But why this particular thing? Why did President Obama think it was so critically important to make these recess appointments? After all, couldn't they have waited until congress was holding its normal session? James Pethokoukis at the American Enterprise Institute thinks he has the answer:

This could be just the beginning. If President Barack Obama’s legally dodgy appointment of Richard Cordray to head the consumer finance agency should stick, it may open the door to more such actions. Here’s Jaret Seiberg of the Washington Research Group:

To us, the most important takeaway from a recess appointment of Cordray is that the President could use this same maneuver to put a housing advocate in charge of FHFA.

And why is that important? The Federal Housing Finance Agency is the regulator and conservator of Fannie Mae and Freddie Mac. And the FHFA currently has an acting director, Edward DeMarco. If Obama replaces him with a “housing advocate” via the same recess appointment process, here’s what might happen next, according to Seiberg:

That could lead to a mass refinancing program for agency-backed mortgages that would go well beyond the existing HARP program. That could hurt agency MBS pricing and result in higher financing costs going forward. Yet it also could be a big boost for the economy and housing going into the election.

Indeed, my sources tell me the Obama administration has been eager to implement just such a plan, but needs to have its own man heading the FHFA to make it happen.

See, what the president is working toward is a massive refinancing of every home in America that desires it, at a lower interest rate. If he can get away with just appointing people to this agency, he can do it with another, and this was a trial run. If it was blocked, its no big deal. If it isn't - and I cannot see the slightest shred of possibility he will be stopped - then he can go on with his real intent, according to this information.

The cost to the country and finance institutions would be around 250 billion dollars, split evenly, according to the plan. Any home that desires a refinance could get one, at a 4,2% fixed loan or less, regardless of the home and without an inspection. Just flat out sign a paper and you're done, as long as you aren't behind on your payments.

Columbia University economists Glenn Hubbard and Christopher Mayer came up with the plan and have details on a website:

We estimate that 72 percent of owner occupant homeowners would be eligible to refinance at no cost to them. Their monthly mortgage payments would fall by an average of $355, for a total national fiscal injection $7.1 billion each month.

The typical borrower would reduce his or her principal and interest payments by about $350 dollars, a total reduction in mortgage payments of nearly $100 billion per year.

The macroeconomic stimulus effect should also include an additional housing wealth effect ... With an estimated aggregate housing valuation of about $18 trillion, housing wealth would increase about $1.8 trillion relative to what it might fall to without this program.

Combining these estimates gives a total macroeconomic stimulus of as $118 billion per year in lower mortgage payments and any new consumer spending due to a housing wealth effect.

What this would do is greatly reduce the loan burden of a lot of people for a relatively low cost (in terms of Washington DC, at least; a quarter of a trillion dollars is a vast sum of money elsewhere. At its best, this would give the housing industry a shot in the arm, free up money for a lot of people, and reduce the individual debt of citizens in the United States.

It also would make the president look like a really great guy. He would, by doing this, hand out lower cost loans to a host of people, and help them climb out of heavy mortgages by a small amount. Although many people at this point have low rates, most do not have this low an interest rate on their home, and that means they would owe less and individual payments would be reduced.

Which would in turn mean people have more money in their pockets, which could help with spending and thus stimulate the economy. I suspect the professors overestimate the effect, and adding another $125 billion to the national debt overnight when we're already $15 trillion in debt is a questionable stunt. But it probably would help President Obama and give him a shot in the polls. Further, its not impossible that this move would actually help the economy somewhat.

If the economy gets better, President Obama's shot at reelection gets better, particularly with a sycophantic media willing to trumpet any unemployment rate under 8% as happy days and wonderful news. Any recovery or growth would be portrayed as glowing sunshine and happy children, with the old 90s era montage of people shopping and money being printed, as Ace of Spades likes to remind us of.

At the same time, this would be a huge help for home owners and I'm all for the economy getting better.

Here's the problem with this scheme (other than increasing the debt), and its one that goes on behind the scenes. Existing banks are already rocky, having barely survived the 2007 crash. Most banks survive by making loans, especially housing mortgages. They make money by loaning money out and being paid the interest, which is profit for them. With the housing market being the way it is, with all the foreclosures and skipped loans, banks are having a tough time of it.

This scheme would require banks to effectively eat a large portion of those loans, by reducing the interest rates. On top of that, they would have to pay out $125 billion dollars to implement the plan. And when banks suffer and do poorly, then so does the money flow, and that impacts businesses.

Further, if you damage one sector of the economy in an attempt to assist another, that's not exactly going to help matters much. That's like fixing a hole in the wall by tearing out materials from another.

To make this up, banks would be forced to charge higher interest rates for future loans, because they have to have that income to survive. That means future expansion and investment, home owning and building would be damaged, which means the housing industry wouldn't actually be helped all that much. Helping present home owners with their existing homes and loans does not mean other people will have an easier time getting homes or that it will be any easier to sell a house. And at least some banks might collapse if this happens, further damaging the economy.

I have no crystal ball. I can't see what effects actions will have on the economy, I can only see what has happened in the past when someone has tried something. To the best of my knowledge no one has done this before, so its impossible to say with any great certainty what would happen. If I had to guess, I would say that the bad effects would be delayed long enough to pass the November 2012 elections, and that's good enough for President Obama. But what about the rest of us?

Ordinarily I'd figure the president has top end economists and good people working on the case. I'd figure that the best minds and better-informed people than I were studying this and its effects to see how it would best take effect. But given the hapless batch of theoreticians, academics, reset button makers, and ivory tower thinkers the White House seems to be packed with now, I am not confident.